Conservative Spending Slows Growth in Cloud Software Industry

TECH BRIEF

Conservative Spending Slows Growth in Cloud Software Industry

Amidst cost optimization drives, cloud software giants such as Snowflake and Twilio are witnessing a slowdown in net revenue retention (NRR), a crucial metric reflecting new spending. A more cautious approach from participating entities – the likes of finance, marketing, and IT departments – has reportedly triggered this industrial shift.

In the quarter ending January this year, Snowflake observed a dip in its NRR from 158% to 131%. While this figure may still surpass industry standards, it undeniably indicates a deceleration in new spending. As per Jamin Ball, partner at tech-specialized investment firm Altimeter Capital, the median net retention rate for the software world has been " steadily declining." In the fourth quarter, this median rate fell to 111%, after peaking at 121% in the first quarter of 2022.

Despite economic signals pointing towards strength, with interest rates stabilizing and the Nasdaq eliminating 2022 losses to hit new highs, the retrenchment in the tech universe remains. Cloud-based communications software pioneer Twilio reported an NRR of 102% in February, registering just 5% year-over-year revenue growth, a stark contrast from its 139% NRR in the fourth quarter of 2020.

Snowflake CFO, Mike Scarpelli, has implied that NRR is destined to coincide with the company's revenue growth sooner or later. Amazon CEO Andy Jassy also echoed concerns, acknowledging 'cost optimization' impacts on business dynamics. Amid such financial narrative, crucial industry players including Twilio, Snowflake, or Zoom, anticipate a rebound in their retention rates in the upcoming quarters.

Overall, the conservative spending trend reveals a contrast to the rapid growth previously experienced in the cloud software industry, with stakeholders adopting a more cautious approach in their investment strategies.

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